Fitbit Inc: FIT Stock Finally Delivers After Earnings

As we have come to expect, Fitbit Inc (NYSE:FIT) once more beat analyst expectations in the second quarter. The difference this time around is that Fitbit stock actually traded higher in response.

Fitbit Inc: FIT Stock Finally Delivers After Earnings

FIT stock is currently up 7% in after hours trading, with two million shares traded.

While volume is sure to rise significantly more by the time after-hours trading concludes (and again Wednesday during the trading day), Fitbit stock’s 6% gain is a good sign.

What Fitbit Did (And FIT Stock Is Doing)

Fitbit reported adjusted per-share earnings of 12 cents, beating the consensus by a penny. Its revenue of $587 million grew 46.6% year-over-year and beat expectations by $8.5 million. It was not the biggest beat in Fitbit’s history at all, but with FIT stock down 72% the past year, it is clear that Fitbit shares didn’t need much to impress investors.

Furthermore, Fitbit really impressed in its international operations. The U.S. still comprised over 75% of total revenue. However, EMEA and Other Americas grew 150% and 63%, respectively, year-over-year. Once more, Fitbit Blaze and Alta sales & accessories largely responsible for Fitbit’s performance. Sales associated with these two products rose to 54% of total revenue versus 50% in the first quarter.

This implies that Alta and Blaze sales outperformed the broader business. This will come as a shock to some who downgraded and were bearish Fitbit stock ahead of earnings, citing inventory problems with Blaze and Alta devices. Therefore, Fitbit’s quarter was by most standards very impressive.

So why was I left wanting more?

FIT Stock Can Do MUCH Better With Investors

With the Fitbit Blaze now six months old, I thought that Fitbit had a great opportunity to unveil a new services segment. This would showcase a new recurring revenue stream associated with smart wearables that investors could get excited about. Instead, Fitbit did no such thing. It opted to pump big Blaze and Alta “related” sales.

The fundamental issue at Fitbit is not its growth or products, but rather, investors always looking ahead to the next product and quarter. Fact is, Wall Street does appreciate hardware and one-time sales. It wants recurring revenue, and Fitbit had the perfect opportunity to put recurring revenue and a services business on display.

With that said, Fitbit’s quarter and growth was undeniably strong. And the stock’s valuation has priced in the company’s dismal profit performance. Remember, it was second-quarter EPS guidance that sent FIT stock crashing after the first quarter three months ago. Fitbit beat those low expectations by just a penny as GAAP net income was just one-third of what the company reported in the same period last year.

That’s because research and development, sales and marketing, and general and administrative costs all more than doubled year-over-year. Also, a near threefold increase in stock-based compensation didn’t help matters much. Nonetheless, Fitbit is still king in a wearables market where it competes against much larger ecosystems and companies that have a far greater reach.

Fitbit beating earnings yet again is another flashing indicator that FIT is here to stay. That said, my biggest concern is that Fitbit stock won’t hold its gains and that it won’t trend higher to the levels it rightfully deserves to trade at.

The bottom line is the same as it has been for the last six months: Fitbit desperately needs a recurring revenue stream, for the sake of Fitbit stock.

As of this writing, Brian Nichols was long FIT stock.

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